IN THE UNITED STATES BANKRUPTCY COURT FOR THE … · The Debtor’s Business 4. Founded in 2009,...

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re

CANDI CONTROLS, INC.,1

Debtor.

Chapter 11

Case No. 18-10679 (CSS)

DECLARATION OF DOUGLAS KLEIN

IN SUPPORT OF FIRST-DAY MOTIONS

DOUGLAS KLEIN, under penalty of perjury, states:

1. This declaration relates to and supports the “first-day” motions of Candi Controls, Inc.,

debtor-in-possession (the “Debtor”) in this Chapter 11 case, filed on March 28, 2018, shortly

after the Court’s entry of an order for relief under Chapter 11 on March 27, 2018 (the “Relief

Date”), following the filing of an involuntary petition for relief under Chapter 11 on March 23,

2018 (the “Petition Date”), including: (a) the Debtor’s Motion Of Debtor For Authority To Pay

Pre-Petition Claims For Wages, Salaries, Reimbursable Expenses, And Employee Benefits (the

“Employee Motion”); (b) the Debtor’s Motion for Order Authorizing Debtor to Continue Using

Existing Bank Accounts and Business Forms (the “Bank Accounts Motion”); and (c) the

Debtor’s Motion for Interim and Final Orders Authorizing Debtor to Obtain Post-Petition

Financing and Granting Security Interests and Adequate Protection (the “DIP Financing

Motion”).

2. I am a non-officer contract employee of the Debtor and have performed chief financial

officer-type services for the Debtor since October 2017. I submit this Declaration on personal

knowledge, accumulated in my capacity with the Debtor as acting chief financial officer and in

direct communication with members of the Debtor’s management team, principally Steve

1 The last four digits of the Debtor’s federal tax identification number are 4409. The Debtor’s principal place of

business is 428 13th Street, Third Floor, Oakland, CA 94612.

Case 18-10679-CSS Doc 15 Filed 03/28/18 of 19

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Raschke, the Debtor’s CEO. The statements set forth below are true to the best of my personal

knowledge. If called to testify to those statements, I would do so willingly and competently.

3. All capitalized terms used but not defined in this Declaration have the meaning given to

them in the referenced motion.

THE DEBTOR

The Debtor’s Business

4. Founded in 2009, the Debtor began its business by developing and aiming to deploy a

software-as-a-service infrastructure platform that could be employed to address the Internet-of-

Things (IoT) “last mile” problem of securely accessing and managing disparate internet-

connected sensors and other devices and data at low cost. The Debtor’s expert software team

created IoT server software that could be embedded into the commercial data gateways of

leading cloud-based and smart-building management platforms for such companies as Intel and

Google. The Debtor’s software could be bundled into integrated platforms such as Intel’s

Building Management Platform and the Google Cloud Platform in application for energy

management, comfort, asset monitoring, and operational efficiency. Before beginning to focus

on the smart building market in 2016, the Debtor had early success in developing proprietary,

patented software and associated intellectual property assets used in “edge-to-cloud” IoT service

platforms, connecting hardware “edge” sensors and devices and the data they produce with

cloud-based operating systems. The Debtor’s software can translate, normalize, and secure data

from physical devices and deliver usable, consolidated data to service providers. The Debtor

owns six IoT platform patents already issued and an additional pending patent application. The

Debtor’s software technology is currently licensed to Intel. The Debtor’s business model relies

on recurring fees for customer licenses and use of the Debtor’s software services. The Debtor has

no current revenues and recently downsized to preserve cash and pursue an acquisition.


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Debtor’s Sale Efforts

5. As a development company, the Debtor relied on capital raised from investors to cover its

operating expenses, including compensation paid to the Debtor’s engineering and software

development team, sales and marketing personnel, and other employees and contractors. Like all

technology startups, the Debtor faced unanticipated challenges and unpredictable events along its

path. Between 2010 and 2014, the Debtor raised nearly $7 million in equity investment from

accredited investors. In those early years, the Debtor used its initial equity funding to develop the

Debtor’s technology and successfully deployed products with several utility industry customers.

The Debtor’s core technology evolved over time from front-end software applications to

embedded Internet-Of-Things gateway software and data management. Because of long sales

cycles and slow growth in the utility industry, the Debtor began seeking alternative channels.

6. In May 2015, the Debtor found its first “exit” opportunity in which it could be acquired

into a larger corporate organization and provide a meaningful return to the Debtor’s equity

investors. A major international technology industry leader offered $24 million in cash to

purchase the Debtor whole, with employee earn-out incentives and an escrow hold-back. The

Debtor’s then-investment banker helped negotiate the deal and term sheet. The Debtor accepted

the structure of the transaction and began two months of intense due diligence. Shortly before the

Debtor expected to close the transaction in August 2015, the would-be acquirer abruptly

informed the Debtor that it was unilaterally rescinding its acquisition offer. The Debtor and its

management team were surprised and disappointed at the buyer’s withdrawal despite the buyer’s

advising the Debtor that its stated reason for withdrawing was the Debtor’s lack of fit with the

buyer’s technology requirements, such as code practices, languages, and security. The Debtor

scrambled to fix the issues the buyer identified as objectionable and the Debtor’s management


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tried for several months to re-negotiate the transaction, but ultimately the buyer declined to

revisit the transaction.

7. The Debtor had put sales and fund-raising on hold to complete the putative buyer’s

demanding due diligence. After that acquisition failed in August 2015, the Debtor found itself

severely short on cash. The Debtor had just closed a promising contract with Intel, and industry-

leading technology companies were offering support as a partner in commercial applications, so

the Debtor decided to raise additional funds quickly to pivot the Debtor into the smart buildings

market.

8. The Debtor was unable to find a lead investor of another round of equity financing in late

2015, but several existing equity investors expressed a willingness to invest in debt instruments

rather than equity. The Debtor offered convertible notes to all existing investors and raised

approximately $6.75 million in convertible notes from 2015-2017 over four tranches. These

convertible notes constitute unsecured debt obligations. (The Debtor has no secured debt

obligations other than the $223,000 of prepetition secured debt held by the Bridge Loan Lenders

described in paragraph 13 below. The Debtor’s total unsecured trade debt, which does not

include the unsecured debt represented by the convertible notes, is approximately $7,000, almost

entirely comprising unpaid prepetition fees for the Debtor’s non-bankruptcy counsel.)

9. Initially, the Debtor’s relationship with Intel to power Intel’s Building Management

Platform (BMP) validated the Debtor’s technology and applications. But within a year, Intel had

reorganized its IoT team and changed its market strategy. Intel failed to commit the resources

necessary to drive BMP market success, and it struggled to fix internal technology issues that

affected BMP reliability. Altogether, Intel significantly delayed the Debtor’s ability to launch the


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BMP product, negatively affecting the Debtor’s other partnerships, and weakening the Debtor’s

continuing pitches to possible additional investors.

10. The Debtor’s effort to raise additional debt financing was extensive. From 2015 to 2017,

the Debtor engaged different three investment bankers—North River Capital Advisors,

Corporate Finance Associates, and Ocean Tomo Investments. Between the investment bankers

and the Debtor’s own efforts, the Debtor pursued over 70 different institutional, strategic, and

venture investors to lead a “Series C” financing or, alternatively, to acquire the company. The

Debtor’s CEO, Steve Raschke, made scores of investment pitches, sometimes two or three times

over a multi-year period to the same group. Some expressed interest to invest behind a lead

investor. But despite exhaustive efforts, no potential investor (including several major

technology industry giants and dozens of venture and institutional investment firms) was willing

to lead the Series C with a term sheet.

11. By December 2017, the Debtor’s available cash began to grow exceedingly tight. The

Debtor had determined that raising a Series C was increasingly unlikely and believed it had no

choice but to lay off employees, preserve cash, and focus on selling the Debtor or its intellectual

property before the end of February 2018. To reduce cash burn, the Debtor laid off eight

employees in sales, support, and operations. The Debtor put all field projects on hold. The

Debtor did retain its core engineers to keep the software development team together for an

acquirer and began preparing the Debtor’s intellectual property for an acquisition.

12. A formal bidding process was coordinated by the Debtor’s investment banker, Corporate

Finance Associates. With the Debtor’s help, they expanded their search for an acquirer to over

30 potential acquirers including Intel, Dell, Google, HP, IBM, Johnson Controls, Cisco,

Schneider, Yardi, Microsoft, Silicon Labs, Accenture, and several others. The bid process ended


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in late February with only two written offers—one for a mere $50,000 for the Debtor’s

intellectual property, and one from Altair Engineering, Inc. (“Altair”) that has resulted in the

commencement of this case and the Debtor’s Sale Motion to approve the Transaction. But for the

Altair offer and the debtor-in-possession financing Altair is providing, the Debtor would have

had to cease all business operations by approximately March 16, 2018.

13. The Debtor’s ability to sustain operations even through the Petition Date was enabled by

secured emergency bridge financing obtained as soon as the Altair transaction became a

possibility. In connection with providing the Debtor with mission-critical operational funding for

March 2018 in anticipation of the Altair sale, two existing unsecured creditors (i.e., holders of

convertible notes), Nicholas Brown and Konstantinos Exarchos, loaned $200,000 to the Debtor

on or about March 1, 2018, and obtained a security interest in all the Debtor’s assets, perfected

by a UCC-1 financing statement filed with the Delaware Department of State on March 1, 2018.

This prepetition secured loan is identified in the APA as the “Bridge Period Funding” and

Messrs. Brown and Exarchos as the “Bridge Loan Lenders,” along with Asher Waldfogel, Doug

Harp, and Steve Raschke, all three of whom are insiders of the Debtor who, together with Mr.

Brown, extended an additional $23,000 in loans to the Debtor shortly before the Petition Date,

secured by a UCC-1 financing statement filed with the Delaware Department of State. To the

Debtor’s knowledge, no other party other than the Bridge Loan Lenders claims a prepetition

security interest in any of the Debtor’s assets.

EMPLOYEE MOTION

The Debtor’s Workforce

14. As of the Petition Date, the Debtor employs ten full-time salaried employees and one

part-time salaried employee. Additionally, the Debtor has engaged the services of three

individuals—Martin Fairfax (one of the debtor’s full-time senior software engineers), Douglas


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Klein (the Debtor’s part-time chief financial officer), and Lauren Cox-Pursley (the Debtor’s part-

time bookkeeper)—as 1099 contract employees rather than W-2 employees.

15. Without exception, the Debtor’s employees are critical to the continuity of the Debtor’s

business and the value of the Debtor’s assets and estate. All employees’ skills, knowledge, and

understanding of the Debtor’s operations are essential to maintaining the Debtor’s business as a

going concern and maximizing the value of the Debtor’s assets for disposition in the context of

this Chapter 11 case. Without the employees’ continued services, an effective sale of the

Debtor’s assets and operations will not be possible.

16. The Debtor’s obligations to its employees include wages, salaries, payments and payroll

deductions for employee benefits, withholdings, and limited reimbursements for expenses

initially borne by a few individual employees. Before the Petition Date, the Debtor customarily

either paid or withheld all of these obligations in the ordinary course of business.

Wages and Salaries

17. All employees are paid bi-weekly, every other Wednesday, four days in arrears, through

direct deposit or checks. Each Tuesday before a Wednesday payroll day, the Debtor transfers

funds to Paychex to fund the payroll, which is paid the next day via direct deposit for those

employees that have electronic deposits and via checks drawn from Paychex’s bank account as

and when employees negotiate their checks.

18. The Debtor’s next payroll is scheduled for April 4, 2018, relating to the period from

March 18, 2018, through March 31, 2018, which includes payroll for the days between March 18,

2018, and the Relief Date. The aggregate payroll on April 4 will be approximately $60,300.00.

19. The Debtor has remained current on all its payroll obligations to its employees at all

times up to the Petition Date. Accordingly, the payroll amount owing to any single employee

attributable to the prepetition period is well under the priority amount of $12,850. The Debtor


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seeks authority to continue its payroll in the ordinary course of business, including the payment

of all employee wages and salaries relating to the prepetition period. If the Debtor is unable to do

so, the Debtor’s employees may resign their positions with the Debtor at a time when employees’

services are crucial to the Debtor and its success in this Chapter 11 case.

Withholding

20. The Debtor is required by law to withhold from an employee’s paycheck amounts related

to federal and state income taxes and social security, FICA, and unemployment taxes

(collectively, the “Withholding Taxes”) for remittance to the appropriate governmental

authorities. The Debtor must also match from its own funds social security and Medicare taxes

withheld and pay (based on a percentage of gross payroll) additional amounts for state and

federal unemployment insurance (the “Employer Payroll Taxes”). The Debtor withholds a total

of approximately $16,800 from all employees’ paychecks for Withholding Taxes during each

payroll, which are funded through a direct withdrawal from the Debtor’s payroll account on the

day payroll is made. The Debtor remits a total of approximately $4,500 for Employer Payroll

Taxes each payroll. To the extent that any payroll has not been processed for the prepetition

period, the Debtor has not funded either the Withholding Taxes or the Employer Payroll Taxes.

Accordingly, the Debtor seeks authority to continue to process and remit all prepetition

Withholding Tax and Employer Payroll Tax obligations in the ordinary course of business.

Reimbursable Expenses

21. Operational expenses incurred on the Debtor’s behalf (“Employee Expenses”) consist of

expenses accrued by employees who submit those expenses to the Debtor for reimbursement.

Employee Expenses include, among other things, business travel expenses, local travel expenses,

parking, and other minor, episodic expenses. Generally, the Debtor expects employees to submit

Employee Expenses for reimbursement as soon as possible after they are incurred but, because


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some employees may not yet have submitted their Employee Expenses incurred before the

Petition Date, the Debtor cannot accurately estimate the amount of Employee Expenses that

remain unreimbursed for the prepetition period. Based on historical averages, the Debtor believes

that there may be approximately $2,000 in unreimbursed Employee Expenses attributable to the

prepetition period. The Debtor seeks authority to reimburse employees for their prepetition

Employee Expenses in the ordinary course of business. If the Debtor is unable to do so, the

individual employees will unfairly bear the burden of having paid the Debtor’s expenses from

their personal funds, severely undermining employee morale at a time when these employees’

best efforts are crucial to the Debtor and its success in this Chapter 11 case.

Employee Benefits

22. All full-time W-2 employees are eligible to participate in medical, dental, vision, life, and

accidental death and dismemberment (AD&D) insurance plans offered by the Debtor (the

“Benefit Plans”).2 (Employees previously were eligible to participate in a 401(k) Safe Harbor

retirement savings plan, but the Debtor terminated that benefit for all employees as of March 17,

2018, in order to conserve cash by ending the Debtor’s obligation to match employee

contributions under that plan.) Under the Benefit Plans, employees and the Debtor each make

monthly premium payments. To maintain employee morale and not unfairly impose hardships on

its workforce, the Debtor seeks authority to pay any outstanding unpaid premiums, deductibles,

and other claims in respect of the Benefit Plans accruing before the Petition Date and to continue

to honor prepetition policies relating to the Benefit Plans.

a. Medical. All W-2 employees are eligible to participate in a medical plan through

United Healthcare (“UHC”). Under this plan, the Debtor pays an aggregate premium in the

2 The Debtor is not required by applicable law to provide COBRA benefits and, therefore, does not.


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approximate amount of $5,768 per month for all participating employees to UHC.

Approximately 64% of the eligible employees receive medical benefits under this plan, which is

fully insured, with premiums paid by the participating employees and the Debtor on a cost-

sharing basis. The monthly premium paid to UHC is paid on the tenth day of the coverage month.

For that reason, and because the Debtor timely made the March 2018 premium payment in the

ordinary course, no portion of the premium due to UHC at the beginning of April 2018 will

relate to the period before the Petition Date. Nonetheless, out of an abundance of caution, the

Debtor seeks authority to pay any prepetition amounts owing to UHC relating to this medical

insurance policy to ensure continuity of the policy for the employees’ benefit.

b. Dental and Vision. The Debtor offers dental and vision insurance programs to full-

time salaried employees administered by CoPower Inc. Under this plan, the Debtor pays an

aggregate premium in the approximate amount of $1,404 per month for all participating

employees to CoPower. All full-time employees are covered under the dental and vision plan.

Coverage for the employee is paid for by the Debtor and coverage for any employee dependents,

if elected, is paid by the participating employees through payroll contributions. The monthly

premium paid to CoPower is paid on the first day of the coverage month. Because the Debtor

timely made the March 2018 premium payment in the ordinary course, the Debtor does not

believe that, as of the Petition Date, it owes any amounts in respect of insurance coverage for the

dental and vision plan. Out of an abundance of caution, however, the Debtor seeks authorization

to pay any such prepetition claims when they come due in the ordinary course of business.

c. Group Life and AD&D Insurance. The Debtor offers its full-time employees

premium-based life insurance coverage and AD&D insurance through CoPower. Basic life and

AD&D insurance coverage is made available to employees and paid by the Debtor. The premium


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is embedded in the Dental and Vision insurance plan. Voluntary life and AD&D insurance is

made available to employees and their dependents; employees are responsible for the cost of

those voluntary insurance coverages. The monthly premiums paid by the Debtor for basic life

and AD&D insurance coverage are paid at the beginning of each month for coverage during that

month. The Debtor timely made the March 2018 premium payment in the ordinary course.

Although the Debtor does not believe that any prepetition amount is owed to CoPower in this

regard, out of an abundance of caution and to maintain employee morale, the Debtor requests

authority to pay any prepetition costs related to life and AD&D insurance benefits in the ordinary

course of business.

d. Workers’ Comp. Under California law, the Debtor must provide workers’

compensation insurance to its employees at the statutorily-required levels for employment-

related injury claims. The Debtor maintains a workers’ compensation benefits program through

Employers Preferred Insurance Company (“EPIC”). This program provides benefits to all the

Debtor’s employees for claims as well as premiums, deductibles, and other charges (the

“Worker’s Comp Obligations”). EPIC acts as a third-party administrator and provides

guaranteed cost insurance coverage at the statutorily-required level. The Debtor has prepaid

EPIC in full for coverage through August 31, 2018, subject to adjustment at the end of the policy

period to reflect the Debtor’s actual insured payroll expense versus the estimated insured payroll

expense used to determine the annual premium paid in advance. Although the Debtor is current

with EPIC, the timing of the Petition Date may mean that the Debtor owes EPIC certain

prepetition amounts on account of the estimated annual premium being below the actual earned

premium. The Debtor seeks authority to pay, in its discretion, prepetition claims arising from the

Worker’s Comp Obligations that come due after the Petition Date.


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e. Retention Plan. The Debtor maintains a prepetition retention plan covering

substantially all the Debtor’s employees and key contract employees, including the Debtor’s

three full-time executive employees—namely, Steve Raschke (the Debtor’s Chief Executive

Officer), Douglas Harp (the Debtor’s Chief Operating Officer), and Michael Anderson (the

Debtor’s Vice President of Software)—who constitute “insiders” for purposes of Bankruptcy

Code § 503(c).3 The Debtor seeks authority to continue the retention plan solely with respect to

the Debtor’s seven non-insider employees and one key contractor. No amount is due to any

employee under the retention plan as of the Petition Date. The retention plan provides each

eligible employee a lump-sum payment in connection with the termination of that employee’s

employment if and only if the employee continues to work through the date of, among other

now-inapplicable events, the closing of a sale of substantially all the Debtor’s assets. The

retention payments scheduled for each eligible employee is based on the employee’s share of the

retention pool, which is in turn based on each employee’s annual base salary divided by the total

base salaries of all pool participants. The pool is 10% of the net sale proceeds available for

distribution (including amounts that may be held in escrow) to the Debtor’s convertible

noteholders and stockholders. Total retention payments to be made to non-insider employees

under the retention plan, assuming a sale of substantially all the Debtor’s assets closes as planned,

is approximately $125,000. Providing non-insider employees with reasonable retention payments

will ensure that these employees—whose efforts are critical to the continued operation of the

Debtor’s business pending a going-concern sale and the effective implementation of the Debtor’s

restructuring efforts in this Chapter 11 case—will continue to work toward achieving the goals of

3 None of the Debtor’s other employees is an “insider” as defined in Bankruptcy Code § 101(31)(B) because none participates in the corporate or operational management of the Debtor. See In re Foothills Texas, Inc., 408

B.R. 573 (Bankr. D. Del. 2009). Although Douglas Klein acts as the Debtor’s part-time chief financial officer,

he has been at all times a contract employee of the Debtor and not a participant in the retention plan.


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this Chapter 11 case despite personally facing the near-certain loss of their own employment

with the Debtor. Because no retention payments are anticipated at the earliest stages of this case,

the Debtor will seek authority to honor retention payments only after the Court’s consideration of

those payments in connection with the Court’s approval of a sale of substantially all the Debtor’s

assets. The Debtor will not make any retention payments and/or severance payments unless and

until a sale of substantially all the Debtor’s assets is approved and consummated and only if

approved by the Court on the Debtor’s separate motion. Approved retention payments and/or

severance payments will not be paid from advances under the Debtor’s debtor-in-possession

financing but, rather, may only be paid from the proceeds of the sale of the Debtor’s assets after

payment of the secured claims of the debtor-in-possession lender (i.e. if Altair is entitled to such

payment under the Interim DIP Financing Order, the DIP Credit Agreement, or the APA), the

Bridge Loan Lenders, and any others.

23. The Debtor’s employees rely on their full compensation and reimbursement of expenses

to meet their daily living expenses and will be exposed to significant financial difficulties if the

Debtor is not permitted to pay the Employee Obligations and Employee Benefits. The Debtor’s

failure to meet its obligations to its employees in the ordinary course would destroy employee

morale and likely cause most employees to simply resign, inflicting immediate and pervasive

damage to the Debtor’s ongoing business operations. The resulting harm to the Debtor’s estate

and the value of the estate’s assets would be immediate, irreparable, and incalculable.

24. The Debtor’s employees are vital to the continued operation of the Debtor’s business.

Authorizing the Debtor to pay the Employee Obligations and honor the Employee Benefits is

necessary to maintain employee morale and to prevent employees from suffering personal

hardship or from seeking other employment.


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BANK ACCOUNTS MOTION

Debtor’s Bank Accounts

25. In the ordinary course of business, the Debtor uses conventional bank accounts to manage

its cash and support its business operations: (a) a “Business Choice Checking Account”

maintained at Wells Fargo Bank, which serves as the Debtor’s general operating account to

satisfy payroll, accounts payable, taxes, and other ordinary course operating obligations, with a

balance as of the Relief Date of approximately $20,792; (b) a second checking account that had

previously been used to receive funds from investors, with a zero balance as of the Relief Date;

and (c) a savings accounts, which had previously been used to store excess cash not needed for

short-term operational expenses, with a balance as of the Relief Date of approximately $200.

These three accounts (the “Bank Accounts”) are FDIC-insured and are held at Wells Fargo

Bank, a US Trustee-approved depository institution.

26. The Debtor’s operations do not currently generate revenue; typically, the Debtor paid

expenses and funded its bank account from cash made available to the Debtor from several

rounds of equity and unsecured debt financing raised in private placements. As of the Petition

Date, nearly all the Debtor’s cash had been used to satisfy the Debtor’s most recent payroll, so

the balances in the Bank Accounts are exceedingly low.

27. The Debtor seeks a waiver of the United States Trustee’s requirement that the prepetition

Bank Accounts be closed and that new post-petition “debtor-in-possession” accounts be opened.

If enforced in this case, that requirement would cause unnecessary disruption in the Debtor’s

business and would cause the estate unnecessary expense for no benefit, especially considering

the relatively small amount of funds involved.

28. The Debtor further seeks authorization to continue operating, in the ordinary course of

business, under depository or similar contracts between themselves and Wells Fargo Bank where


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the Bank Accounts are located. Under the usual and ordinary terms that existed under those

contracts before the Petition Date, Wells Fargo Bank could charge back and revoke provisional

credits for deposited items that are returned unpaid and charge the amounts of these items against

balances from time to time on deposit in the Bank Accounts, and to assess and deduct from the

Bank Accounts customary periodic service charges. The Debtor seeks authorization to continue

these ordinary course practices regardless of whether those items were deposited prepetition or

post-petition and regardless of whether the items are returned prepetition or postpetition.

29. To avoid delays in payments to ordinary course administrative creditors, to ensure as

smooth a transition into Chapter 11 as possible with minimal disruption, and to aid in the

Debtor’s efforts to successfully and rapidly complete this case, it is important that the Debtor be

permitted to continue to maintain its Bank Account in the ordinary course of business and under

the existing agreements between the Debtor and Wells Fargo Bank.

30. The Debtor can easily distinguish between prepetition and postpetition obligations and

payments without closing the Bank Accounts and opening new ones. Wells Fargo Bank has

considerable experience in Chapter 11 cases being advised to honor or dishonor prepetition

checks, advices, drafts, and other requests for payment. Wells Fargo Bank also collateralizes a

debtor-in-possession’s bank accounts in accordance with the depository agreement with the US

Trustee. There is no need to open new accounts simply to ensure that sufficient funds exist for

the payment of federal and state payroll taxes.

Existing Business Forms and Checks

31. To minimize expense to the estate and to minimize disruption of its business, the Debtor

requests that it be authorized to continue to use its existing stock of pre-printed checks,

correspondence, and business forms (including letterhead, stationery, etc.) in the form that they


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exist immediately before the Petition Date (collectively, the “Business Forms”), without

reference to the Debtor’s status as a debtor-in-possession.

32. Because of the nature and scope of the Debtor’s business operations will continue to be

narrow and limited in advance of a sale of the Debtor’s assets, changing the Business Forms

would be needlessly expensive and burdensome to the Debtor’s estate and would not confer any

benefit on those dealing with the Debtor. (The Debtor, nonetheless, will endeavor to print any

checks in-house on blank stock and will label all post-petition checks with the legend “Debtor-

In-Possession” and the Debtor’s bankruptcy case number as soon as practicable.)

DIP FINANCING MOTION

The Debtor’s Need for Financing

33. As of the Petition Date, the Debtor had exceedingly little cash on hand, nowhere near

enough to cover even one payroll for the Debtor’s employees. The Debtor does not currently

have or expect in the foreseeable future to have any material revenue or source of operating

capital other than the financing proposed to be obtained from the DIP Lender. Because the

Debtor intends, and is required by the DIP Lender (who is the proposed buyer of substantially all

the Debtor’s assets), to continue operating by maintaining its payroll to ensure that its key

employees remain employed to preserve the value of the Debtor’s assets pending the proposed

sale to Altair, the Debtor has an immediate need for mission-critical operating funds to meet its

relatively modest operating expenses and the administrative expenses of this chapter 11 case.

34. As demonstrated by the Debtor’s operating budget attached to the DIP Financing Motion

as Exhibit B (the “Budget”), which projects operating and administrative expenses for the next

five weeks (at which time the Debtor hopes to close its asset sale with Altair), the Debtor’s need

for the proposed financing is dire. Without it, this case, the Debtor’s prospects for completing a


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sale of its assets to Altair (or any other buyer), and essentially any hope for a meaningful return

to the Debtor’s creditors will collapse.

Efforts to Obtain DIP Financing and the Debtor’s Liquidity Needs

35. To fund the operationally critical expenses reflected in the Budget, the Debtor requires

new liquidity from a new, third-party source. Shortly before the Petition Date, the Debtor was

facing an imminent reality that it would run out of cash and would be forced to terminate all

employees and cease all operations. With no present revenue and no realistic prospects of

revenue in the immediate or foreseeable future, the Debtor was without any ability to obtain debt

financing from any third-party lender. Any rational lender would have perceived far too much

risk of non-repayment of any loan in any amount from a borrower such as the Debtor without

revenue or other sources of income and without demonstrably liquid assets to provide a basis for

an asset-based loan. Even if the Debtor had time to pursue DIP financing from sources other than

the DIP Lender—and the Debtor had no such time—any efforts would have surely been futile.

36. Further, as described above, the Debtor had already undertaken considerable efforts to

raise debt financing for some two years before the Debtor began to run out of operating cash in

early 2018. Most recently, the Debtor approached existing creditors—holders of the Debtor’s

convertible notes—regarding financing a Chapter 11 proceeding and received no expressions of

interest. As it is, the Bridge Loan Lenders were only willing to provide a modest loan to allow

the Debtor to maintain core operations until the DIP financing proposed in the Motion was

obtained. The DIP Lender, as the proposed buyer of substantially all the Debtor’s assets, is

literally the only party that has indicated or would reasonably ever be expected to indicate a

willingness to provide the liquidity the Debtor needs to maintain operations and meet

administrative expenses until a closing of a § 363 sale. Consequently, the Debtor has an


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immediate need to obtain postpetition financing and that immediate need can only be met by the

financing the DIP Lender would provide under the DIP Facility.

Necessity of DIP Facility

37. As described above, it is essential to the success of the Debtor’s Chapter 11 case and the

successful sale of the Debtor’s assets that the Debtor immediately obtain access to sufficient

post-petition financing. Without it, the Debtor will be unable to sustain even skeleton operations

pending a sale of its assets, will be unable to meet the administrative expenses of this case, and

will ultimately have to abruptly and irreversibly cease operations. If that were to occur, the

Debtor’s estate and its creditors would be gravely and irreparably harmed. Any reasonable hope

of a recovery for unsecured creditors would be all but lost.

Negotiation of the DIP Facility

38. The Debtor negotiated the DIP Facility’s terms with the DIP Lender in good faith and at

arms’ length, with both parties represented by separate, independent counsel. As described above,

the Debtor assessed its dire situation and peculiar circumstances and determined in its best

business judgment that no reasonable alternative sources of post-petition financing existed other

than the DIP Lender, who was motivated to provide financing principally because it is the

proposed buyer of substantially all the Debtor’s assets. Given the urgency of obtaining financing

and the imminence of an irreversible operational shutdown, shopping for financing would have

been futile.

39. The DIP Lender, precisely because of its agreement to acquire all the Debtor’s assets, is

uniquely suited to provide highly risky post-petition financing under circumstances where no

other lender would. Because of the Debtor’s inability to generate revenue or other income and

the uncertain liquidity value of the Debtor’s intellectual property assets, the Debtor concluded in


{00022695. } 19

its best business judgment that the DIP Facility constituted the most favorable source of

financing available to the Debtor.

40. Based on a public-records search performed on the Petition Date, the Debtor believes that

no party asserts a lien or security interest in any of the Debtor’s property other than the Bridge

Loan Lenders. Each of the Bridge Loan Lenders has consented to the priming of their liens on

the DIP Collateral by the security interests that would be granted to the DIP Lender under the

DIP Facility. See emails from all Bridge Loan Lenders, attached to this Declaration as Exhibit A.

Debtor’s Business Judgment

41. As described above, after appropriate investigation and analysis, the Debtor has

concluded that the DIP Facility is the best alternative available under the circumstances.

42. The Debtor has exercised sound business judgment in determining that a post-petition

credit facility is appropriate and has satisfied the legal prerequisites to borrow under the DIP

Facility. The terms of the DIP Facility are fair and reasonable and are in the best interests of the

Debtor’s estate.

43. The Debtor and the DIP Lender negotiated the DIP Facility in good faith, at arm’s length,

and without collusion, each represented separately by counsel of their choosing.

March 28, 2018

/s/ Douglas Klein

Douglas Klein


EXHIBIT A

Case 18-10679-CSS Doc 15-1 Filed 03/28/18 Page 1 of 6

3/26/2018 Candi Controls, Inc. Mail - Re: Consent to Altair DIP loan as prime

https://mail.google.com/mail/u/0/?ui=2&ik=735c06e818&jsver=lr-NdqmOTUs.en.&view=pt&q=nick%20consent%20prime&qs=true&search=query&th=1624af807fe557

Steve Raschke <[email protected]>

Re: Consent to Altair DIP loan as prime 1 message

[email protected] <[email protected]> Wed, Mar 21, 2018 at 4:49 PMTo: Steve Raschke <[email protected]>

Yes I consent On Mar 21, 2018, at 7:37 PM, Steve Raschke <[email protected]> wrote:

Nick, This is a formal request via email. As we discussed, in order to proceed with the DIP financing, Altairrequires secured bridge note holders to consent that Altair's DIP loan will be secured and senior to thebridge notes. Please reply that you consent to the following: Altair Engineering, as proposed debtor-in-possession lender, requires that a security interest in all CandiControls’ assets be granted to it such that its security interest is senior in priority to the security interestalready granted to you in those same assets. In consideration of the benefit to you as a secured creditor and unsecured creditor of Altair’s providingfinancing to enable and facilitate a sale of Candi’s assets to Altair or a higher bidder, do you consent toAltair’s lien securing the debtor-in-possession financing being senior to the lien granted to you? -- Steve RaschkePresident & CEO (510) 433-0900 x203Candi Controls, Inc.


mailto:[email protected]

tel:(510)%20433-0900

http://www.candicontrols.com/

3/26/2018 Candi Controls, Inc. Mail - Re: Priming DIP loans

https://mail.google.com/mail/u/0/?ui=2&ik=735c06e818&jsver=lr-NdqmOTUs.en.&view=pt&q=from%3Ame%20to%3Ajordan%20consent&qs=true&search=query&th=1


Re: Priming DIP loans 1 message

Steve Raschke <[email protected]> Thu, Mar 22, 2018 at 2:18 PMTo: "Kroop, Jordan A. (Perkins Coie)" <[email protected]>

Steve Raschke consents Steve Raschke CEO, Candi

“Altair Engineering, as proposed debtor-in-possession lender, requires that a security interest in all CandiControls’ assets be granted to it such that its security interest is senior in priority to the security interestalready granted to me in those same assets. In consideration of the benefit to me as a secured creditorand unsecured creditor of Altair’s providing financing to enable and facilitate a sale of Candi’s assets toAltair or a higher bidder, I consent to Altair’s lien securing the debtor-in-possession financing being seniorto the lien granted to me.”

Jordan Kroop | Perkins Coie LLP

PARTNER

2901 North Central Avenue Suite 2000

Phoenix, AZ 85012-2788

D 602 351 8017

M 602 690 4024

E [email protected]

-- Steve RaschkePresident & CEO (510) 433-0900 x203Candi Controls, Inc.


https://maps.google.com/?q=2901+North+Central+Avenue+Suite+2000+%0D%0A+Phoenix,+AZ+85012&entry=gmail&source=g

https://maps.google.com/?q=2901+North+Central+Avenue+Suite+2000+%0D%0A+Phoenix,+AZ+85012&entry=gmail&source=g

tel:(602)%20351-8017

tel:(602)%20690-4024

mailto:%[email protected]

tel:(510)%20433-0900



https://mail.google.com/mail/u/0/?ui=2&ik=735c06e818&jsver=lr-NdqmOTUs.en.&view=pt&q=harp%20consent%20prime&qs=true&search=query&th=1624a1d3e20ea



Doug Harp <[email protected]> Wed, Mar 21, 2018 at 12:50 PMTo: Steve Raschke <[email protected]>

Steve Yes I agree. Doug Harp, PE916-806-3052 Sent from my iPhone On Mar 21, 2018, at 12:35 PM, Steve Raschke <[email protected]> wrote:

Doug, This is a formal request via email. As we discussed,in order to proceed with the DIP financing, Altairrequires secured bridge note holders to consent that Altair's DIP loan will be secured and senior to thebridge notes. Please reply that you consent to the following: Altair Engineering, as proposed debtor-in-possession lender, requires that a security interest in all CandiControls’ assets be granted to it such that its security interest is senior in priority to the security interestalready granted to you in those same assets. In consideration of the benefit to you as a secured creditor and unsecured creditor of Altair’s providingfinancing to enable and facilitate a sale of Candi’s assets to Altair or a higher bidder, do you consent toAltair’s lien securing the debtor-in-possession financing being senior to the lien granted to you? -- Steve RaschkePresident & CEO (510) 433-0900 x203Candi Controls, Inc.


tel:(916)%20806-3052


tel:(510)%20433-0900



https://mail.google.com/mail/u/0/?ui=2&ik=735c06e818&jsver=lr-NdqmOTUs.en.&view=pt&q=gus%20consent%20prime&qs=true&search=query&th=1624edc678a5c3



Gus Exarchos <[email protected]> Thu, Mar 22, 2018 at 10:56 AMTo: Steve Raschke <[email protected]>

Steve, I'm on board with the approach. Please proceed. Thank you,Gus On Mar 21, 2018, at 6:15 PM, Steve Raschke <[email protected]> wrote:

Gus, quick reminder that we need your "I consent" emailed back by Thursday so we can proceed. Steve ---------- Forwarded message ---------- From: Steve Raschke <[email protected]> Date: Wed, Mar 21, 2018 at 12:38 PM Subject: Consent to Altair DIP loan as prime To: Gus Exarchos <[email protected]> Gus, This is a formal request via email. As we discussed, in order to proceed with the DIP financing, Altairrequires secured bridge note holders to consent that Altair's DIP loan will be secured and senior to thebridge notes. Please reply that you consent to the following: Altair Engineering, as proposed debtor-in-possession lender, requires that a security interest in all CandiControls’ assets be granted to it such that its security interest is senior in priority to the security interestalready granted to you in those same assets. In consideration of the benefit to you as a secured creditor and unsecured creditor of Altair’s providingfinancing to enable and facilitate a sale of Candi’s assets to Altair or a higher bidder, do you consent toAltair’s lien securing the debtor-in-possession financing being senior to the lien granted to you? -- Steve RaschkePresident & CEO (510) 433-0900 x203Candi Controls, Inc. -- Steve RaschkePresident & CEO (510) 433-0900 x203Candi Controls, Inc.





tel:(510)%20433-0900


tel:(510)%20433-0900



https://mail.google.com/mail/u/0/?ui=2&ik=735c06e818&jsver=lr-NdqmOTUs.en.&view=pt&q=asher%20consent%20prime&qs=true&search=query&th=1624a108f321



Asher Waldfogel <[email protected]> Wed, Mar 21, 2018 at 12:36 PMTo: Steve Raschke <[email protected]>

Yes, I consent.

From: Steve Raschke <[email protected]> Date: Wednesday, March 21, 2018 at 12:36 PM To: Asher Waldfogel <[email protected]> Subject: Consent to Altair DIP loan as prime

Asher, This is a formal request via email. As we discussed,in order to proceed with the DIP financing, Altair requires securedbridge note holders to consent that Altair's DIP loan will be secured and senior to the bridge notes.

Please reply that you consent to the following: Altair Engineering, as proposed debtor-in-possession lender, requires that a security interest in all Candi Controls’ assetsbe granted to it such that its security interest is senior in priority to the security interest already granted to you in thosesame assets. In consideration of the benefit to you as a secured creditor and unsecured creditor of Altair’s providing financing to enableand facilitate a sale of Candi’s assets to Altair or a higher bidder, do you consent to Altair’s lien securing the debtor-in-possession financing being senior to the lien granted to you?

--

Steve Raschke

President & CEO

(510) 433-0900 x203

Candi Controls, Inc.




tel:(510)%20433-0900


IN THE UNITED STATES BANKRUPTCY COURT FOR THE … · The Debtor’s Business 4. Founded in 2009,...

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Transcript of IN THE UNITED STATES BANKRUPTCY COURT FOR THE … · The Debtor’s Business 4. Founded in 2009,...